Indofood Agri Resources

Material Risks from Contested Land and Labor Issues

February 6, 2017
Singapore-listed Indofood Agri Resources (Indofood Agri) is one of the largest oil palm plantation companies in Indonesia. With its five palm oil refineries, it also is the domestic market leader for branded cooking oils, margarine and fats. Anthoni Salim controls the company. Indofood Agri’s market capitalization is USD 502 million.

Key Findings

42 percent of Indofood Agri’s 549,287 ha total landbank is contested. Indofood Agri controls 63 concessions. Six plantations (7 percent of its total landbank) allegedly have community conflicts and labor controversies. Four plantations (9 percent of its undeveloped landbank) are located on peat and/or forest areas, potentially prohibited from development given Indonesian government regulations. Approximately 5,900 ha of peatland burned in 2015 on Indofood Agri’s concessions. 16 plantation companies (29 percent of its total landbank) do not publish concession maps.

A RSPO complaint was recently filed accusing Indofood Agri of employing child labor and exhibiting poor labor practices. The company has allegedly undermined job security for workers and the freedom of association in trade unions. It is allegedly paying employees below the minimum wage and setting individual quotas for workers unrealistically high. Also, the company allegedly employs children to assist with harvesting. The company runs the risk that its RSPO membership is suspended as a result of this complaint.

Indofood Agri is one of the many listed companies controlled by the Salim family. This complicated holding structure, controlled by a small group of managers, aims to attract outside financing without losing control. A small group of managers controls all these Salim businesses, which derive their sales and market values to a large extent from the same assets. Indofood Agri generates 28 percent of its revenues from other Salim businesses. This creates governance risks for outside investors.

At least 36 percent of the CPO processed in Indofood Agri’s refineries comes from undisclosed sources. This is creating both supply chain and reputation risks for its buyers and investors. Simultaneously, various private oil palm plantation companies indirectly controlled by Anthoni Salim are developing supply chain and reputation risks by their deforestation activities for their CPO buyers.

The identified contested landbank and alleged labor risks could have a 2.5 percent to 20 percent negative impact on Indofood Agri’s share price. Possible loss of its RSPO certifications can have a negative impact of 2.5 percent on the stock price. Furthermore, the stock price decline could be amplified to around 20 percent if banks and equity investors with ESG policies avoid the company because of social, environmental and governance concerns.